Nouriel Roubini sees ‘the roots of the next crisis in the current one’

By Chrystia Freeland
December 8, 2010

Nouriel Roubini is #12 on on Foreign Policy’s list of the 100 Top Global Thinkers of 2010. Over the past few years, the economist at New York University says he’s been thinking most about why financial crises occur and whey they are occurring more frequently than we have expected.

Contrary to the conventional notion that crises are random and infrequent events, Roubini has been arguing for the better part of a decade that financial crises can be predicted based on macroeconomic and policy mistakes. In fact, they occur every few years in some country around the world, he says. Roubini characterizes these financial crises as a “white swan” event. He emphasizes their regularity in his recent book Crisis Economics. Roubini says the pattern of crises is always the same: initially there is an economic boom, which drives up asset prices, leading to an excessive build-up of debt and leverage, which eventually leads to a downturn and then a market crash and bust.

The co-founder of Roubini Global Economics, Roubini credits his 20 years of experience studying financial crises in emerging markets — he published a book about their causes and consequences in 2004 — for enabling him to spot the risks for a crash. He also notes that others who foresaw the crisis, such as Morgan Stanley Asia’s Steve Roach and then-Merrill Lynch economist David Rosenberg, share a global view of economic dynamics, intellectual courage and a certain outsider status, a characteristic that fellow FP Global Thinker Mohamed El-Erian said was vital for his own success.

Looking ahead, Roubini worries about the balance of power in a world in which the U.S. is no longer a superpower. Global governance has shifted to the G-20 from the G-7, which was really a G-1, with the United States playing the role of the global hegemon and provider of global public goods. As America’s power declines, there is no country stepping in to be the world’s leader. Instead, emerging powers like China, Brazil, and India are all free-riding on America’s contributions to international order. Roubini fears that the world will go from a G-20 to a “G-0″, where there will be political and economic disorder.

Foreign Policy says Roubini deserves his high rank on the list “for seeing the roots of the next crisis in the current one”:

Being a global economic Cassandra isn’t a cheerful job, but someone’s got to do it — and Nouriel Roubini acknowledges that he fits the role perfectly. He has even embraced the moniker “Dr. Doom,” a name derisively pinned on him before the 2008 crash that showed his pessimism was warranted. And so while everyone’s still trying to figure out how to overcome the last financial crisis, Roubini has his sights set firmly on the next one — which, Dr. Doom assures us in his book, Crisis Economics, won’t latest be too far off.

Roubini argues that the United States is at serious risk of heading back into a recession, and unlike other talking heads, he puts a number on his prediction, saying there’s a 40 percent chance of the United States hitting the dreaded “double dip.” Why? He thinks the root causes of the current malaise have only been covered over and that unhealthy levels of debt are once again piling up around the world — though this time on government accounting ledgers. It’s only a matter of time, he says, until we start seeing national bankruptcies — perhaps even a cascade of them across Europe that sparks the dissolution of the euro. If Roubini has one message, it’s that crises aren’t unforeseeable “black swan” events, but “white swans” — the culmination of long trends that are perfectly intelligible to anyone who takes the time to examine the data. We may not like Dr. Doom’s advice, but we can’t say he didn’t warn us.

You can read a Q&A with Roubini in Foreign Policy.

Posted by Peter Rudegeair.

3 comments

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Just normal. The small investors lost. It was a game not to be in and I, for one, will not go back into the market. I think Mr Roubini knows a lot, but just because he does does not mean we should all follow him. I think our leaders are looking for a golden horse shoe, but common sense will win every time.

Posted by fred5407 | Report as abusive

the reason boom bust cycles are predictable is that the present debt-money system. The money and credit supply is created as debt by privately owned Central Banks. Government officials, elected or career bureaucrats and academia on the other hand are highly corruptible–intellectually, monetarily, power, and status wise. Therefore, no one talks about the money issue honestly.

A government for the people shall not need to borrow “debt money” from the bankers who create the “debt money” out of thin air, and use that money to buy and fund the government power, which collect taxes from real people’s sweat equity to pay interest to the bankers.

The bankers profit from the boom and bust cycles. The bankers create a lot of phantom debt-money in order to create a lot of debt-obligations which allow bankers to collect a lot of interests from real people and businesses who convert the debt-money into goods and services (interest and principle payments are based on money that acquired “real” status from the sweat labor and assets of the real people and businesses).

The Bust Cycles allow the bankers to purchase assets pennies on the dollar.

This is why the Boom and Bust cycles are predictable and periodic. The third world countries are more clueless than the developed countries about the nature of debt money, and its death grip is especially bad. For the developed countries, the death is slower, but certain. It is only a matter of time.

To solve this problem, Central Banks and Federal Reserve must be abolished, and the “people” must create debt-free money and credit. This debt-free money and credit can be loaned to people and businesses directly with nominal interest–say 0.25% to 4% depending on the desirability and importance of the economic activities to the society.

All “banks” must be “mutually owned” by the depositors. For example,local and community banks are owned by the depositors. Federal Banks are owned by all people of the country on a basic alloted shares for each citizen, with additional shares alloted by the amount of tax paid. State Banks should be similarly owned.

Government bodies are funded from the interest payments collected, which would greatly reduce the tax burden on the citizens. The amount of money and credit issued is exactly matched to the growth rate desired. There would be very little or no inflation, no deflation, no sovereign debt, and no irresponsible banksters/gamblers/fraudster who pocket profit privately, and socialize loses of their gambling and frauds. The bankers are so rich and powerful, all politicians,economists, academia, and talking heads are basically mesmerized and fearful of exposing the simple truth.

Posted by BraveTruth | Report as abusive

More than a bit simplistic. The U.S. and Britain weren’t the only Liberal Democracies providing those public goods, plus I’m not sure that the U.S. wasn’t much more than an extension of the British empire (with better domestic weather to keep us from wandering as much). Words like NATO, SEATO, IMF, World Bank, (even sometimes U.N.) document the ecumenical character of power in the last half century.

In fact, it is totally possible that the lack of a single dominant power will finally force those freeloading countries to get off their duff, or face declines in their own stability. Even the French are capable of recognizing the desirability of secure and open sea lanes.

Posted by ARJTurgot2 | Report as abusive