[R-G] [BillTottenWeblog] Dr Doom

[Suzanne de Kuyper]

The way I look at the situation in the United States, Nouriel Roubini an
optimist in his pubished writings and 'for public' musings.  A conservative
realist.  There are articulate carefully vetted studies of emerging
eoconomic trends, not yet under the economists radar, that now drive the an
unleashed , unregulated, U.S. economy.
S.M. de Kuyper
Amsterdam

On Wed, Aug 27, 2008 at 3:04 AM, Bill Totten <shimogamo at attglobal.net>wrote:

>
> by Stephen Mihm
>
> The New York Times (August 17 2008)
>
>
> On September 7 2006, Nouriel Roubini, an economics professor at New York
> University, stood before an audience of economists at the International
> Monetary Fund and announced that a crisis was brewing. In the coming
> months and years, he warned, the United States was likely to face a
> once-in-a-lifetime 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 dollars of mortgage-backed securities unraveling worldwide and the
> global financial system shuddering to a halt. These developments, he
> went on, could cripple or destroy hedge funds, investment banks and
> other major financial institutions like Fannie Mae and Freddie Mac.
>
> The audience seemed skeptical, even dismissive. As Roubini stepped down
> from the lectern after his talk, the moderator of the event quipped, "I
> think perhaps we will need a stiff drink after that". People laughed -
> and not without reason. At the time, unemployment and inflation remained
> low, and the economy, while weak, was still growing, despite rising oil
> prices and a softening housing market. And then there was the espouser
> of doom himself: Roubini was known to be a perpetual pessimist, what
> economists call a "permabear". When the economist Anirvan Banerji
> delivered his response to Roubini's talk, he noted that Roubini's
> predictions did not make use of mathematical models and dismissed his
> hunches as those of a career naysayer.
>
> But Roubini was soon vindicated. In the year that followed, subprime
> lenders began entering bankruptcy, hedge funds began going under and the
> stock market plunged. There was declining employment, a deteriorating
> dollar, ever-increasing evidence of a huge housing bust and a growing
> air of panic in financial markets as the credit crisis deepened. By late
> summer, the Federal Reserve was rushing to the rescue, making the first
> of many unorthodox interventions in the economy, including cutting the
> lending rate by fifty basis points and buying up tens of billions of
> dollars in mortgage-backed securities. When Roubini returned to the IMF
> last September, he delivered a second talk, predicting a growing crisis
> of solvency that would infect every sector of the financial system. This
> time, no one laughed. "He sounded like a madman in 2006", recalls the
> IMF economist Prakash Loungani, who invited Roubini on both occasions.
> "He was a prophet when he returned in 2007".
>
> Over the past year, whenever optimists have declared the worst of the
> economic crisis behind us, Roubini has countered with steadfast
> pessimism. In February, when the conventional wisdom held that the
> venerable investment firms of Wall Street would weather the crisis,
> Roubini warned that one or more of them would go "belly up" - and six
> weeks later, Bear Stearns collapsed. Following the Fed's further
> extraordinary actions in the spring - including making lines of credit
> available to selected investment banks and brokerage houses - many
> economists made note of the ensuing economic rally and proclaimed the
> credit crisis over and a recession averted. Roubini, who dismissed the
> rally as nothing more than a "delusional complacency" encouraged by a
> "bunch of self-serving spinmasters", stuck to his script of "nightmare"
> events: waves of corporate bankrupticies, collapses in markets like
> commercial real estate and municipal bonds and, most alarming, the
> possible bankruptcy of a large regional or national bank that would
> trigger a panic by depositors. Not all of these developments have come
> to pass (and perhaps never will), but the demise last month of the
> California bank IndyMac - one of the largest such failures in US history
> - drew only more attention to Roubini's seeming prescience.
>
> As a result, Roubini, a respected but formerly obscure academic, has
> become a major figure in the public debate about the economy: the seer
> who saw it coming. He has been summoned to speak before Congress, the
> Council on Foreign Relations and the World Economic Forum at Davos. He
> is now a sought-after adviser, spending much of his time shuttling
> between meetings with central bank governors and finance ministers in
> Europe and Asia. Though he continues to issue colorful doomsday
> prophecies of a decidedly nonmainstream sort - especially on his popular
> and polemical blog, where he offers visions of "equity market slaughter"
> and the "Coming Systemic Bust of the US Banking System" - the mainstream
> economic establishment appears to be moving closer, however fitfully, to
> his way of seeing things. "I have in the last few months become more
> pessimistic than the consensus", the former Treasury secretary Lawrence
> Summers told me earlier this year. "Certainly, Nouriel's writings have
> been a contributor to that".
>
> On a cold and dreary day last winter, I met Roubini over lunch in the
> TriBeCa neighborhood of New York City. "I'm not a pessimist by nature",
> he insisted. "I'm not someone who sees things in a bleak way". Just
> looking at him, I found the assertion hard to credit. With a dour manner
> and an aura of gloom about him, Roubini gives the impression of being
> permanently pained, as if the burden of what he knows is almost too much
> for him to bear. He rarely smiles, and when he does, his face, topped by
> an unruly mop of brown hair, contorts into something more closely
> resembling a grimace.
>
> When I pressed him on his claim that he wasn't pessimistic, he paused
> for a moment and then relented a little. "I have more concerns about
> potential risks and vulnerabilities than most people", he said, with
> glum understatement. But these concerns, he argued, make him more of a
> realist than a pessimist and put him in the role of the cleareyed
> outsider - unsettling complacency and puncturing pieties.
>
> Roubini, who is fifty, has been an outsider his entire life. He was born
> in Istanbul, the child of Iranian Jews, and his family moved to Tehran
> when he was two, then to Tel Aviv and finally to Italy, where he grew up
> and attended college. He moved to the United States to pursue his
> doctorate in international economics at Harvard. Along the way he became
> fluent in Farsi, Hebrew, Italian and English. His accent, an inimitable
> polyglot growl, radiates a weariness that comes with being what he calls
> a "global nomad".
>
> As a graduate student at Harvard, Roubini was an unusual talent,
> according to his adviser, the Columbia economist Jeffrey Sachs. He was
> as comfortable in the world of arcane mathematics as he was studying
> political and economic institutions. "It's a mix of skills that rarely
> comes packaged in one person", Sachs told me. After completing his PhD
> in 1988, Roubini joined the economics department at Yale, where he first
> met and began sharing ideas with Robert Shiller, the economist now known
> for his prescient warnings about the 1990s tech bubble.
>
> The 1990s were an eventful time for an international economist like
> Roubini. Throughout the decade, one emerging economy after another was
> beset by crisis, beginning with Mexico's in 1994. Panics swept Asia,
> including Thailand, Indonesia and Korea, in 1997 and 1998. The economies
> of Brazil and Russia imploded in 1998. Argentina's followed in 2000.
> Roubini began studying these countries and soon identified what he saw
> as their common weaknesses. On the eve of the crises that befell them,
> he noticed, most had huge current-account deficits (meaning, basically,
> that they spent far more than they made), and they typically financed
> these deficits by borrowing from abroad in ways that exposed them to the
> national equivalent of bank runs. Most of these countries also had
> poorly regulated banking systems plagued by excessive borrowing and
> reckless lending. Corporate governance was often weak, with cronyism in
> abundance.
>
> Roubini's work was distinguished not only by his conclusions but also by
> his approach. By making extensive use of transnational comparisons and
> historical analogies, he was employing a subjective, nontechnical
> framework, the sort embraced by popular economists like the Times Op-Ed
> columnist Paul Krugman and Joseph Stiglitz in order to reach a
> nonacademic audience. Roubini takes pains to note that he remains a
> rigorous scholarly economist - "When I weigh evidence", he told me, "I'm
> drawing on twenty years of accumulated experience using models" - but
> his approach is not the contemporary scholarly ideal in which an
> economist builds a model in order to constrain his subjective
> impressions and abide by a discrete set of data. As Shiller told me,
> "Nouriel has a different way of seeing things than most economists: he
> gets into everything".
>
> Roubini likens his style to that of a policy maker like Alan Greenspan,
> the former Fed chairman who was said (perhaps apocryphally) to pore over
> vast quantities of technical economic data while sitting in the bathtub,
> looking to sniff out where the economy was headed. Roubini also cites,
> as a more ideologically congenial example, the sweeping, cosmopolitan
> approach of the legendary economist John Maynard Keynes, whom Roubini,
> with only slight exaggeration, calls "the most brilliant economist who
> never wrote down an equation". The book that Roubini ultimately wrote
> (with the economist Brad Setser) on the emerging market crises,
> "Bailouts or Bail-Ins?" contains not a single equation in its 400-plus
> pages.
>
> After analyzing the markets that collapsed in the 1990s, Roubini set out
> to determine which country's economy would be the next to succumb to the
> same pressures. His surprising answer: the United States. "The United
> States", Roubini remembers thinking, "looked like the biggest emerging
> market of all". Of course, the United States wasn't an emerging market;
> it was (and still is) the largest economy in the world. But Roubini was
> unnerved by what he saw in the US economy, in particular its 2004
> current-account deficit of $600 billion. He began writing extensively
> about the dangers of that deficit and then branched out, researching the
> various effects of the credit boom - including the biggest housing
> bubble in the nation's history - that began after the Federal Reserve
> cut rates to close to zero in 2003. Roubini became convinced that the
> housing bubble was going to pop.
>
> By late 2004 he had started to write about a "nightmare hard landing
> scenario for the United States". He predicted that foreign investors
> would stop financing the fiscal and current-account deficit and abandon
> the dollar, wreaking havoc on the economy. He said that these problems,
> which he called the "twin financial train wrecks", might manifest
> themselves in 2005 or, at the latest, 2006. "You have been warned here
> first", he wrote ominously on his blog. But by the end of 2006, the
> train wrecks hadn't occurred.
>
> Recessions are signal events in any modern economy. And yet remarkably,
> the profession of economics is quite bad at predicting them. A recent
> study looked at "consensus forecasts" (the predictions of large groups
> of economists) that were made in advance of sixty different national
> recessions that hit around the world in the 1990s: in 97 percent of the
> cases, the study found, the economists failed to predict the coming
> contraction a year in advance. On those rare occasions when economists
> did successfully predict recessions, they significantly underestimated
> the severity of the downturns. Worse, many of the economists failed to
> anticipate recessions that occurred as soon as two months later.
>
> The dismal science, it seems, is an optimistic profession. Many
> economists, Roubini among them, argue that some of the optimism is built
> into the very machinery, the mathematics, of modern economic theory.
> Econometric models typically rely on the assumption that the near future
> is likely to be similar to the recent past, and thus it is rare that the
> models anticipate breaks in the economy. And if the models can't foresee
> a relatively minor break like a recession, they have even more trouble
> modeling and predicting a major rupture like a full-blown financial
> crisis. Only a handful of 20th-century economists have even bothered to
> study financial panics. (The most notable example is probably the late
> economist Hyman Minksy, of whom Roubini is an avid reader.) "These are
> things most economists barely understand", Roubini told me. "We're in
> uncharted territory where standard economic theory isn't helpful".
>
> True though this may be, Roubini's critics do not agree that his
> approach is any more accurate. Anirvan Banerji, the economist who
> challenged Roubini's first IMF talk, points out that Roubini has been
> peddling pessimism for years; Banerji contends that Roubini's apparent
> foresight is nothing more than an unhappy coincidence of events. "Even a
> stopped clock is right twice a day", he told me. "The justification for
> his bearish call has evolved over the years", Banerji went on, ticking
> off the different reasons that Roubini has used to justify his
> predictions of recessions and crises: rising trade deficits, exploding
> current-account deficits, Hurricane Katrina, soaring oil prices. All of
> Roubini's predictions, Banerji observed, have been based on analogies
> with past experience. "This forecasting by analogy is a tempting thing
> to do", he said. "But you have to pick the right analogy. The danger of
> this more subjective approach is that instead of letting the objective
> facts shape your views, you will choose the facts that confirm your
> existing views."
>
> Kenneth Rogoff, an economist at Harvard who has known Roubini for
> decades, told me that he sees great value in Roubini's willingness to
> entertain possible situations that are far outside the consensus view of
> most economists. "If you're sitting around at the European Central
> Bank", he said, "and you're asking what's the worst thing that could
> happen, the first thing people will say is, 'Let's see what Nouriel
> says' ". But Rogoff cautioned against equating that skill with
> forecasting. Roubini, in other words, might be the kind of economist you
> want to consult about the possibility of the collapse of the
> municipal-bond market, but he is not necessarily the kind you ask to
> predict, say, the rise in global demand for paper clips.
>
> His defenders contend that Roubini is not unduly pessimistic. Jeffrey
> Sachs, his former adviser, told me that "if the underlying conditions
> call for optimism, Nouriel would be optimistic". And to be sure, Roubini
> is capable of being optimistic - or at least of steering clear of
> absolute worst-case prognostications. He agrees, for example, with the
> conventional economic wisdom that oil will drop below $100 a barrel in
> the coming months as global demand weakens. "I'm not comfortable saying
> that we're going to end up in the Great Depression", he told me. "I'm a
> reasonable person".
>
> What economic developments does Roubini see on the horizon? And what
> does he think we should do about them? The first step, he told me in a
> recent conversation, is to acknowledge the extent of the problem. "We
> are in a recession, and denying it is nonsense", he said. When Jim
> Nussle, the White House budget director, announced last month that the
> nation had "avoided a recession", Roubini was incredulous. For months,
> he has been predicting that the United States will suffer through an
> eighteen-month recession that will eventually rank as the "worst since
> the Great Depression". Though he is confident that the economy will
> enter a technical recovery toward the end of next year, he says that job
> losses, corporate bankruptcies and other drags on growth will continue
> to take a toll for years.
>
> Roubini has counseled various policy makers, including Federal Reserve
> governors and senior Treasury Department officials, to mount an
> aggressive response to the crisis. He applauded when the Federal Reserve
> cut interest rates to two percent from 5.25 percent beginning last
> summer. He also supported the Fed's willingness to engineer a takeover
> of Bear Stearns. Roubini argues that the Fed's actions averted
> catastrophe, though he says he believes that future bailouts should
> focus on mortgage owners, not investors. Accordingly, he sees the choice
> facing the United States as stark but simple: either the government
> backs up a trillion-plus dollars' worth of high-risk mortgages (in
> exchange for the lenders' agreement to reduce monthly mortgage
> payments), or the banks and other institutions holding those mortgages -
> or the complex securities derived from them - go under. "You either
> nationalize the banks or you nationalize the mortgages", he said.
> "Otherwise, they're all toast".
>
> For months Roubini has been arguing that the true cost of the housing
> crisis will not be a mere $300 billion - the amount allowed for by the
> housing legislation sponsored by Representative Barney Frank and Senator
> Christopher Dodd - but something between a trillion and a trillion and a
> half dollars. But most important, in Roubini's opinion, is to realize
> that the problem is deeper than the housing crisis. "Reckless people
> have deluded themselves that this was a subprime crisis", he told me.
> "But we have problems with credit-card debt, student-loan debt, auto
> loans, commercial real estate loans, home-equity loans, corporate debt
> and loans that financed leveraged buyouts". All of these forms of debt,
> he argues, suffer from some or all of the same traits that first
> surfaced in the housing market: shoddy underwriting, securitization,
> negligence on the part of the credit-rating agencies and lax government
> oversight. "We have a subprime financial system", he said, "not a
> subprime mortgage market".
>
> Roubini argues that most of the losses from this bad debt have yet to be
> written off, and the toll from bad commercial real estate loans alone
> may help send hundreds of local banks into the arms of the Federal
> Deposit Insurance Corporation. "A good third of the regional banks won't
> make it", he predicted. In turn, these bailouts will add hundreds of
> billions of dollars to an already gargantuan federal debt, and someone,
> somewhere, is going to have to finance that debt, along with all the
> other debt accumulated by consumers and corporations. "Our biggest
> financiers are China, Russia and the gulf states", Roubini noted. "These
> are rivals, not allies".
>
> The United States, Roubini went on, will likely muddle through the
> crisis but will emerge from it a different nation, with a different
> place in the world. "Once you run current-account deficits, you depend
> on the kindness of strangers", he said, pausing to let out a resigned
> sigh. "This might be the beginning of the end of the American empire".
>
> _____
>
> Stephen Mihm, an assistant professor of economic history at the
> University of Georgia, is the author of A Nation of Counterfeiters:
> Capitalists, Con Men and the Making of the United States (2007). His
> last feature article for the magazine was about North Korean
> counterfeiting.
>
> http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html
>
>
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