Chrystia Freeland

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.

Raghuram Rajan of the University of Chicago Booth School of Business is #26 on Foreign Policy’s list of the 100 Top Global Thinkers of 2010. His big idea is: “capitalist economies work well when everybody has access to the basic conditions they need to compete: access to education, access to health care, and access to finance.” In the absence of these conditions, Rajan argues that a capitalist society will be beset by income inequality, political frictions, and rent-seeking behaviors that subvert healthy competition. Capitalism is at its best when it creates equal opportunity:

If we all started off at age 21, 22, somewhere there, with all the education we needed, all the access to finance we wanted, and reasonable health, and we were told, ‘Here’s a level playing field. Go out and compete.’ And 25 years later some did very well, some did not so well, I think we would all be reasonably satisfied with that outcome. And that’s really the ideal of capitalism. But we’re very far from that ideal. Where you’re  born matters a lot. Of course, what you make of it also matters, but to the extent that you can reduce the impact of where you’re born, what conditions you’re born under, and what kind of impediments that creates, I think capitalism is better for it.

Rajan’s recent book, Fault Lines — the most recommended book on FP’s survey of the Global Thinkers — looks at the recent financial crisis through this lens. In the lead-up to the crisis, many citizens of the United Stated lacked access to higher education, a prerequisite for many of today’s jobs. Median wages stagnated as a result, and the government faced pressure to do something about it. Washington responded with the short-term fix of expanding cheap credit, notably through Fannie Mae and Freddie Mac, which temporarily masked the rise in income inequality but ultimately did nothing to address the structural issues of the U.S. economy.

For his next big idea, Rajan looks to examine the evolution of corporate responsibilities and objectives. In the earliest days of the corporation 400 years ago, Rajan observes that there was a sense that profits were dirty and that people shouldn’t earn more than a certain, predetermined level. Contrast that with the sense in some boardrooms today that a corporation’s guiding principle should be maximizing shareholder value. Rajan wants to find a happy medium between the two which is “less fuzzy than corporate social responsibility but is something which reflects the sense that corporations do have some responsibilities in some areas.”

Foreign Policy anointed Rajan a Global Thinker jointly with Paul Krugman for “their spirited debate over the roots of the global financial meltdown”:

In invariably stinging tones, Nobel laureate Paul Krugman uses his influential New York Times column to place himself at the center of international debates. In the United States, he has held the banner for unabashed deficit spending, ripping Barack Obama’s administration for not pushing for a bigger stimulus package, while excoriating Republicans for demanding austerity. His advice may be predictable, but it never lacks a certain power — or a certain provocation for economists who think differently.

Chief among them at the moment is Raghuram Rajan, former IMF chief economist and now a finance professor at the University of Chicago’s Booth School of Business. This year Krugman and Rajan have fought a running battle across the pages of a half-dozen publications over the causes of the financial crisis.

Rajan … argues that Krugman understates the role mortgage giants Fannie Mae and Freddie Mac played in the crisis because their culpability is inconvenient for Krugman’s big-government liberalism. “U.S. policies encouraged over-consumption and over-borrowing,” he wrote on ForeignPolicy.com, “and unless we understand where these policies came from, we have no hope of addressing the causes of this crisis.” Krugman disses Rajan’s thesis as “a structure built on foundations of sand” and places the brunt of the blame on imbalances in the global economy. Pass the popcorn.

Foreign Policy has Rajan’s recommended reading list and more.

Posted by Peter Rudegeair.

Columbia University economist Joseph Stiglitz is #30 on Foreign Policy’s list of the 100 Top Global Thinkers of 2010. Stiglitz told Chrystia that his big idea is “globalization is something that has to be shaped.”

For much of recent history, special interests have driven the globalization agenda, he says. One of the primary obstacles to completing the Doha Round of free-trade negotiations is the billions of dollars of subsidies the U.S. showers on about 25,000 American cotton farmers, a policy that impoverishes more than 10 million cotton farmers in Africa and that has been judged as a violation of WTO rules.

Despite globalization’s shortcomings, Stiglitz does not believe it is to blame for the hollowing out of America’s middle-class. Increases in productivity and technological changes have reduced the demand for the unskilled labor. “The real failure of public policy,” Stiglitz says, is that “it hasn’t responded effectively to the driving forces of technology and globalization.”  Stiglitz argues that by lowering barriers to trade while failing to invest in health care and education, America has resigned itself to having a middle class that lacks the skills to compete in the global economy.

Stiglitz has not one, but three, big ideas in the pipeline. First, he would like to study the design of financial architecture to find out what the optimal degree of inter-connectivity is in the capital markets. Too often, he says, economists look at either the benefits of risk-sharing or the costs of contagion without formulating a model that considers both.

Second, Stiglitz would like to research the role of ideas in shaping the economy. He recently co-authored a paper with Carla Hoff of the World Bank called “Equilibrium Fictions” that analyzes confirmation bias, the tendency to process information in a way that validates one’s worldview, by looking at the social construct of race in modern history.

Third, Stiglitz outlines his next book, which will look at how the financial crisis has affected globalization and undermined America’s credibility on economic policy.

But, Foreign Policy placed Stiglitz on their list of Top Global Thinkers for a completely different reason — “his full-throated defense of fiscal stimulus”:

If last year was Joseph Stiglitz’s “I told you so” moment, this year has been his “so what do we do about it” opportunity. The Nobel laureate and former World Bank chief economist has gone from predicting the cataclysmic fall of the deregulated global economy to outlining a way back from the abyss.

That’s not to say the famously iconoclastic professor is pulling punches. Stiglitz has excoriated Barack Obama for appointing the very same people who caused the financial crisis to manage the recovery. In his latest book, Freefall: America, Free Markets, and the Sinking of the World Economy, Stiglitz outlines how existential problems such as weak regulations and moral hazard were disregarded in favor of injecting cash back into the most risk-prone banks, while substantive issues such as the foreclosure crisis and the scarcity of small-business loans have worsened with neglect. As for the wave of austerity sweeping Europe, he recently cautioned, that could send the world into an economic tailspin. Stiglitz’s refrain? Forget the deficit and invest boldly in technology and infrastructure. As he wrote in September, “We cannot afford not to stimulate the economy.”

Read a full interview with Stiglitz at Foreign Policy‘s Global Thinkers Issue.

Posted by Peter Rudegeair.

Mohamed El-Erian, PIMCO’s CEO, is #45 on Foreign Policy’s list of the 100 Top Global Thinkers of 2010. He tells Chrystia that his big idea is a “recognition that we are living in a period of major global realignment.”  This rapidly changing environment favors emerging markets, which are accustomed to periods of upheaval, as well as businesses, which have the metrics and flexibility required to make quick course corrections. The developed world has been hobbled by years of inertia, he says, and is at a disadvantage in responding to these global shifts.

In El-Erian’s eyes, being an outsider is fundamentally connected to being a top global thinker.  He credits his unconventional background — growing up in Egypt, studying four different schools of economics at Cambridge, and analyzing emerging markets for 15 year at the IMF — with his ability to spot the realignment in world economic growth towards the developing world.

El-Erian attributes PIMCO’s success to its heterodox culture — the investment giant’s motto is to be “constructively paranoid,” and once a year management invites a “shadow” investment committee to its Newport Beach offices to second-guess the portfolio managers’ investment decisions.

In FP‘s words, El-Erian belongs on the list “for reminding us just how bad things could get:”

The world’s best financial minds have closely watched the prognostications of this Oxbridge-trained economist ever since January 2007, when Mohamed El-Erian, then the head of Harvard University’s endowment, bet $1.6 billion of the school’s money that global markets were headed for a downturn — and turned out to be right.

Author of the 2008 book When Markets Collide, a former IMF economist, and head of investment colossus Pimco, El-Erian helped popularize the term “the new normal” to describe the post-crisis economic era: one in which growth remains stubbornly low everywhere but the developing world. This year, as hopes for a rapid recovery have faded, he has penned a series of full-throated articles warning that world leaders aren’t taking the potential consequences of a prolonged downturn seriously enough.

Read more about El-Erian at Foreign Policy.

Posted by Peter Rudegeair.

Robert Shiller of Yale University is #48 on Foreign Policy’s list of the 100 Top Global Thinkers of 2010. He tells Chrystia that his big idea is that “finance can serve humanity, especially if it democratizes.” In fact, Shiller argues that the spread of finance is responsible for the super-cycle of economic growth that the world has enjoyed over the past half-century. He disputes the charge that finance is mainly beneficial to a small cabal of bankers in the world’s financial capitals.

Over half the population of the United States uses mutual funds, retirement plans and complex mortgage contracts to manage risk. And, risk-management techniques could be expanded to include more of the uncertainties of middle-class life, he says.

Professor Shiller has two big ideas in the pipeline: a book that will address the popular prejudices against finance and a book to be co-written with George Akerlof on the future of international financial regulation.

Here’s Foreign Policy’s take on what makes him a top global thinker:

If there is one financial indicator that has defined America’s current economic malaise, it’s home sales. And if there is a man who has defined that indicator — literally — it’s Robert Shiller. As the co-creator of the go-to reference on the subject, the S&P/Case-Shiller Index, the economist has become the world’s most important housing guru. A decade after famously warning that the dot-com boom was just so much “irrational exuberance,” he was among the first to predict that the housing bubble would pop, and he has spent the last two years saying that we’re not in the clear yet.

Shiller’s unconventional brand of economics — he cites his wife, a psychologist, as a major influence on his thinking — has left him skeptical of optimistic recovery scenarios drawn from past downturns such as the 1990s Asian crash. As he put it in September, “Hopes that the aftermath of the current crisis will turn out better are still in the category of thoughts, theories, and dreams, not science.”

Find out Shiller’s reading list and more at Foreign Policy.

Posted by Peter Rudegeair.

Daron Acemoglu of MIT is #88 on Foreign Policy‘s list of the 100 Top Global Thinkers of 2010.  Acemoglu tells Chrystia that his big ideas involve “the relationship between democracy and development” and “the historical roots of economic success and political success, and unfortunately also economic failure and political failure, across nations.”  Professor Acemoglu explains why he disagrees with modernization theory, which states that nations tend to democratize as they get richer. He also disagrees with the thesis of fellow FP Global Thinker Raghuram Rajan that income inequality was a root cause of the most recent financial crisis.  Acemoglu also discusses the prospects for democratization in China, and Russia’s project to replicate Silicon Valley outside Moscow.  His next big idea, he hinted, is exploring the relationship between individualism and society.

Here’s Foreign Policy‘s take on what makes him a top global thinker:

Some Nobel Prize selections are a genuine surprise. The same won’t be true if Daron Acemoglu, already at age 43 one of the world’s 20 most cited economists, eventually takes the award. Born in Turkey and educated at the London School of Economics, Acemoglu quickly made a name for himself with papers and monographs that examined how economic incentives align with political life. His specialty is the analysis of the political conditions under which markets thrive — namely, democracy. It’s a theme Acemoglu has explored in a steady stream of academic papers, textbooks, and op-eds — work that so impressed his peers that he won the John Bates Clark medal in 2005, given annually to an outstanding economist under age 40. Acemoglu’s next book, co-authored with Harvard University’s James Robinson, Why Do Nations Fail?, argues that a real “freedom agenda” will start with democratic rules rather than free markets. “You would not need armies to implement such a scheme,” Acemoglu said, “just a functioning bureaucracy.”

Head on over to Foreign Policy to find out what’s on Acemoglu’s reading list and what he considers are the best and worst ideas of 2010.

Posted by Peter Rudegeair.

In conjunction with her essay in Foreign Policy‘s Top Global Thinkers issue, Chrystia interviewed six of the financial luminaries that made the list:

MIT’s Daron Acemoglu, Yale’s Robert Shiller, PIMCO’s Mohamed El-Erian, Columbia’s Joseph Stiglitz, the University of Chicago’s Raghuram Rajan, and NYU’s Nouriel Roubini.

Reuters and Foreign Policy will be showing these interviews over the next coming days.  This one is a compilation of the above six global thinkers.

Posted by Peter Rudegeair.