How to prevent a depression

By Nouriel Roubini
September 19, 2011

By Nouriel Roubini
The opinions expressed are his own.

AMSTERDAM – The latest economic data suggests that recession is returning to most advanced economies, with financial markets now reaching levels of stress unseen since the collapse of Lehman Brothers in 2008. The risks of an economic and financial crisis even worse than the previous one – now involving not just the private sector, but also near-insolvent sovereigns – are significant. So, what can be done to minimize the fallout of another economic contraction and prevent a deeper depression and financial meltdown?

First, we must accept that austerity measures, necessary to avoid a fiscal train wreck, have recessionary effects on output. So, if countries in the eurozone’s periphery are forced to undertake fiscal austerity, countries able to provide short-term stimulus should do so and postpone their own austerity efforts. These countries include the United States, the United Kingdom, Germany, the core of the eurozone, and Japan. Infrastructure banks that finance needed public infrastructure should be created as well.

Second, while monetary policy has limited impact when the problems are excessive debt and insolvency rather than illiquidity, credit easing, rather than just quantitative easing, can be helpful. The European Central Bank should reverse its mistaken decision to hike interest rates. More monetary and credit easing is also required for the US Federal Reserve, the Bank of Japan, the Bank of England, and the Swiss National Bank. Inflation will soon be the last problem that central banks will fear, as renewed slack in goods, labor, real estate, and commodity markets feeds disinflationary pressures.

Third, to restore credit growth, eurozone banks and banking systems that are under-capitalized should be strengthened with public financing in a European Union-wide program. To avoid an additional credit crunch as banks deleverage, banks should be given some short-term forbearance on capital and liquidity requirements. Also, since the US and EU financial systems remain unlikely to provide credit to small and medium-size enterprises, direct government provision of credit to solvent but illiquid SMEs is essential.

Fourth, large-scale liquidity provision for solvent governments is necessary to avoid a spike in spreads and loss of market access that would turn illiquidity into insolvency. Even with policy changes, it takes time for governments to restore their credibility. Until then, markets will keep pressure on sovereign spreads, making a self-fulfilling crisis likely.

Today, Spain and Italy are at risk of losing market access. Official resources need to be tripled – through a larger European Financial Stability Facility (EFSF), Eurobonds, or massive ECB action – to avoid a disastrous run on these sovereigns.

Fifth, debt burdens that cannot be eased by growth, savings, or inflation must be rendered sustainable through orderly debt restructuring, debt reduction, and conversion of debt into equity. This needs to be carried out for insolvent governments, households, and financial institutions alike.

Sixth, even if Greece and other peripheral eurozone countries are given significant debt relief, economic growth will not resume until competitiveness is restored. And, without a rapid return to growth, more defaults – and social turmoil – cannot be avoided.

There are three options for restoring competitiveness within the eurozone, all requiring a real depreciation – and none of which is viable:

·         A sharp weakening of the euro towards parity with the US dollar, which is unlikely, as the US is weak, too.

·         A rapid reduction in unit labor costs, via acceleration of structural reform and productivity growth relative to wage growth, is also unlikely, as that process took 15 years to restore competitiveness to Germany.

·         A five-year cumulative 30% deflation in prices and wages – in Greece, for example – which would mean five years of deepening and socially unacceptable depression; even if feasible, this amount of deflation would exacerbate insolvency, given a 30% increase in the real value of debt.

Because these options cannot work, the sole alternative is an exit from the eurozone by Greece and some other current members. Only a return to a national currency – and a sharp depreciation of that currency – can restore competitiveness and growth.

Leaving the common currency would, of course, threaten collateral damage for the exiting country and raise the risk of contagion for other weak eurozone members. The balance-sheet effects on euro debts caused by the depreciation of the new national currency would thus have to be handled through an orderly and negotiated conversion of euro liabilities into the new national currencies. Appropriate use of official resources, including for recapitalization of eurozone banks, would be needed to limit collateral damage and contagion.

Seventh, the reasons for advanced economies’ high unemployment and anemic growth are structural, including the rise of competitive emerging markets. The appropriate response to such massive changes is not protectionism. Instead, the advanced economies need a medium-term plan to restore competitiveness and jobs via massive new investments in high-quality education, job training and human-capital improvements, infrastructure, and alternative/renewable energy. Only such a program can provide workers in advanced economies with the tools needed to compete globally.

Eighth, emerging-market economies have more policy tools left than advanced economies do, and they should ease monetary and fiscal policy. The International Monetary Fund and the World Bank can serve as lender of last resort to emerging markets at risk of losing market access, conditional on appropriate policy reforms. And countries, like China, that rely excessively on net exports for growth should accelerate reforms, including more rapid currency appreciation, in order to boost domestic demand and consumption.

The risks ahead are not just of a mild double-dip recession, but of a severe contraction that could turn into Great Depression II, especially if the eurozone crisis becomes disorderly and leads to a global financial meltdown. Wrong-headed policies during the first Great Depression led to trade and currency wars, disorderly debt defaults, deflation, rising income and wealth inequality, poverty, desperation, and social and political instability that eventually led to the rise of authoritarian regimes and World War II. The best way to avoid the risk of repeating such a sequence is bold and aggressive global policy action now.

This piece originally appeared on Project Syndicate.

Photo: A man walks past a display board of a currency exchange office in Bucharest August 19, 2011. European shares extended the previous session’s sharp sell-off on Friday on deepening worries over slowing global economic growth and the region’s banks facing short-term funding stress because of the euro zone’s sovereign debt crisis. REUTERS/Bogdan Cristel

50 comments

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Couldn’t agree more but I would ask the question of what happens if you take out of the list above Eurobonds via the EFSF, as these will never happen?

Posted by pavlaki | Report as abusive

Couldn’t agree more but I would ask the question of what happens if you take out of the list above Eurobonds via the EFSF, as these will never happen?

Posted by pavlaki | Report as abusive

Greek citizens have been in the streets, for their diminished wages and living standard. America’s middle class is a memory. Now, I like Roubini, but his resort to taxpayer bailouts is brutal and unjust. But we must save the banks – the very banks that piled us into this. Fine. But if it’s me… Dimon, Blankfein and all ya’ all, and all your management, every cent you got is going into the ‘stabilization funds. Your backsides are broke.

Posted by a2freight | Report as abusive

“The latest economic data suggests that recession is returning to most advanced economies, with FINANCIAL MARKETS now reaching levels of stress unseen since the collapse of Lehman Brothers in 2008.” (Emphasis added.)

This opening statement, without anything more, belies your glaring inability to step outside of your conceptual castle, Roubini.

Who cares about the financial markets? You think that pouring more public indebtedness into shoring up these broken, predatory and selfish structures will jump start a recovery, and nothing could be farther from the truth. All that this approach will accomplish is to prolong the dysfunctional regime in place, to feed it on the backs of producers, and to ultimately fuel a catastrophic devolution of the system you seek desperately to preserve.

Christopher Whalen is correct when he posits that “…inflation is the sure result of this strategy … [a]nd deflation is the cure.

The sick structures you support need to fail, and not another dime of public money should be devoted to propping them up. The sooner this happens — painful as it would be now — the less catastrophic will be the results. As it is, we may be entirely too late. Your regimes are responsible for the inflation in values that we have now, and until there is a deflation to real-production values, there will be no recovery.

Posted by BowMtnSpirit | Report as abusive

RE: Seventh. You know, must be nice living in an Ivory Tower way up in the rarefied air above Manhattan where you don’t have to deal with messy affairs, like REALITY!
Right, you are going to take a 50 year old + auto worker and “retraining” him to be a wind turbine engineer?

Your “medium term” solution to “restore competitiveness” will not happen in your or my lifetime “timeframe”, it just takes too long. The only solution to “restore cometitiveness” in a real medium term, i.e.

Posted by xbgp | Report as abusive

While Roubini’s comprehensive recommendations are sound,I am amazed at one point he makes. He writes “To avoid an additional credit crunch as banks deleverage, banks should be given some short-term forbearance on capital and liquidity requirements.” I remember that, on April 1, Simon Johnson of the Institute for International Economics wrote a ‘newsreport’ on his blog that double Nobel Prizes, in Economics and for Peace, had been awarded to the Institute for International Finance for the longstanding lobby of the IIF that the capital and liquidity requirements of the banks should be eased. Of course, Simon meant it as an April Fool’s joke. And now no less an excellent economist than Nouriel Roubini comes up with essentially the same proposition as the IIF! Is Roubini trying to claim the two Nobel Prizes for himself?

Posted by MohamedMalleck | Report as abusive

Recently, I read here on Reuters that the French banking system has a 560 billion Euro (!) exposure to Greece, Italy and Spain. The markets for sovereign debt of these countries is completely frozen up. One should wonder whether Roubini’s recipe for some simple tricks to avoid a great depression work in this light. France is just an example and not the worst one. Apart from the fact that these banks have been doing some very heavy betting (the blame game) I really doubt if any national or international organisation is going to solve this type of solvency problems any time soon. Therefore, confidence – the basis of our dealings with one another -is gone and so is our hope of growth. Looking at our experience with Japan during 20 years, the conclusion might be that we are confronted with problems that actually need Greece-like solutions, which are so harsh that the international community prefers to let it be and run the global economy into the ground.

Posted by Lambick | Report as abusive

Possible solution to avert Depression II: non essential government should be working 4 day (32hr) work weeks (saves jobs & it’s green) raise sin taxes immediately on alcohol,porn and gambling-the industires we could never tax enough to pay for the harm they do! Also, eliminate deductions, role back the Bush cuts and consider a flat tax and no IRS! Slide out of the war, reduce defense and education spending and extend age/etc for social security /medicare and we might just skirt a disaster! Takes a crisis for people to change-let’s try to be proactive this time! Conservative (social and economic-can’t have it both ways-too expensive and poor moral/ethics are behind our downfall!)

Posted by DrJJJJ | Report as abusive

Remember: 80 million boomers (1 out of 4 in US) lining up for unfunded entitlements galore for decades! We’re fat with health problems, little saved/equity, we’re going to live longer and change our spending/investing patterns dramatically! Last call for the spending cuts or pay dearly!

Posted by DrJJJJ | Report as abusive

Government is 40% of US GDP and our debt will exceeed 100% of GDP this year with trillion dollar deficits projected for years!

Posted by DrJJJJ | Report as abusive

As a history honors major in High School, a history major in college, and Juris Doctor with Honors in law school, I’ve read various history statements based upon the various theories of history. Economics and finance is one theory. Roubini’s WWII statement is based upon the economics/financial theory. It could also be said that WWII was based upon the concept of faith in the concept of personal/person-power — personal support for the strength displayed by the Emporer, Hitler, and Mussolini. Their needs could have been based upon economics or even the mere love of power.

Posted by geesam47 | Report as abusive

American politicians and voters have known for the past 10 – 15 years that US debt and Social Security are racing for a crash. Yet nothing has been done. Why should anyone believe the various diverse factions in Europe can resolve their much more complicated problems?

Posted by GrayCo | Report as abusive

My indicators have all gone into the ‘red’ for it is far too late for all parties involved and affected …. The “Horrible Depression” [It is worthy of its own monicker] is upon us now …. That many have failed to appreciate this reality is because we are still at the top of the slope heading into the abyss.

The complete and utter failure of the political ‘leadership’ of any persuasion in the ‘Industrial’ nations to ensure a more equitable dispersion of wealth & risk is tantamount to murdering millions. The result is quite foreseeable … continous revolutionary reaction expressed in ways the will likely beggar all of our imaginations.

Posted by CanadianGeezer | Report as abusive

You have to wonder …. every country in the world – except for a few are in dept up to their eyeballs and are all protecting the financial institutions for taking any hits. Why?

This means that for the next 2 decades – about 1/2 your taxes (around the world) will be to pay annuities (of sorts) to the few financial cartels who hold this debt.

Sort of like corporate welfare where fat cats can sit back and live off the fat of the land (interest from debt payments).

Wouldn’t it be much better for countries to default – take the pain for a year and then emerge stronger – debt free. Historically -every country that did this emerged so much stronger.

Mind you – this takes a strong government able to shake off the deep barbs of the banks – clutched right into their governing elite.

Default is the road to freedom and success.
Supporting the debt (which you can never really pay off) – is the road to modern slavery (at the country level).

Posted by Butch_from_PA | Report as abusive

No one can “Fix” this mess. It must collapse and we can start over. An orderly collapse would be nice, but the quicker we fail, the quicker we can get back to good times.

Posted by tmc | Report as abusive

Hmm… the beginnings of an intelligent discussion on economic change. All too often I enounter shallow, sacred cow massacres with no facts thrown in to ground belief systems in basic diagnostics. A THOUGHT: Perhaps we are all suffering from too much economic interdependence, too many predatory & powerful financial elites, and horribly corrupt self-serving politicians. Like Asian carp in the Mississippi, Nile fever in our mosquitoes, wooly Adelgids in our Hemlocks, and killer bees migrating North from Central America, Economic Globalism has brought its share of adverse consequences to previously thriving economies. Far from “raising all boats”, Globalism is rapidly transferring capital to least cost, most exploitive, most polluting, and least democratic cultures at the direct expense of the most evolved modern societies. It has already decimated the American middleclass, boarded up hundreds of domestic industrial towns, gutted our social safety net, lowered our labor standards, obliterated our retirement savings, and flooded our domestic labor market with low wage service sector jobs with few benefits. LESSON: low low prices = low low wages + high high unemployment + huge huge deficits. Whose model for our economic future are we implementing here? Forget theory – it’s the RESULTS that matter. Whatever theory has been employed for the last 30 years, I think it is long past time to jettison it for something else. It’s been bleeding us to death and we’re running out of time. Some of our economic partners/competitors are probably celebrating our naivite.

Posted by MrAl | Report as abusive

sadly, the best way for Europe and USA to restore competitiveness is to go through this depression…
Back to reality now! The world economy has been inflated artificially with credit based enlargement. It is time to deflate it to its original, true level. Greece should default!

Posted by generalkurtz | Report as abusive

Who has made this recession happen? The elite class has stolen and gambled the world economy into a disaster, but we are told that the poorest members of society, who did not waste their money on gambling on commodities, did not create wealth out of thin air in the form of derivatives and fraudulent ratings of debt instruments, are supposed to pay for it all through lower wages and the theft of Social Security and pensions? Not one “expert” ever calls for correcting out of balance tax rates, closing tax loopholes, ending subsidies to mature industries, or taxing the gambling on commodities and currencies. If you want to find the missing money, it is in the personal bank accounts of the rich. Prosecute white collar crime and seize the assets of those who committed fraud and embezzlement. Corporate tax rates are lower than in many decades, millionaires pay lower rates of income tax then their employees do. Capital gains taxes are given reduced rates while taxes of worker income are charged at the full rate. We are not stupid, we can see this is class warfare and an excuse for excessive exploitation of those who create real products through their labor. Bailing out banks has resulted in management salaries at levels 400 times that of workers, and bonuses given out of the bailout money, taken as personal gifts in return for their failure.

Posted by aligatorhardt | Report as abusive

There was a good article that surfaced after the riots in England that should be food for thought. http://www.thenation.com/article/162809/ daylight-robbery-meet-nighttime-robbery

Posted by aligatorhardt | Report as abusive

Roubini is correct in all he says with one exception: he tries to create hope with flawed impossible scenarios. There is no hope. GD 2 is coming because the flawed human nature that drove the mistakes in the early 30s that deepened the GD are alive and well today and, having not learned the lessons of history, are repeating the very same mistakes. Roubini has a reputation to preserve so he has to fabricate hope where none is justified as no economist stays employed if he doesn’t present optimism however unfounded. I have no such burden. Batten the hatches. She’s comin’ and she’s a big’un.

“Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self preservation strikes its jarring gong–these are features which constitute the endless repetition of history.”
— Winston Churchill

“In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.”
— Rudiger Dornbusch

Posted by advocatusdiabol | Report as abusive

Dr. Doomsday definitely exaggerates. He is constantly predicting Armageddon hoping that if his prophecy fulfills he will be elevated to a goddess status. Note that he got his lucky win predicting financial crisis of 2008 but after that he was permanently wrong.

Posted by wirk | Report as abusive

I honestly think Keynesianism is what got us in this mess in the first place. The theory encourages credit led consumption instead of savings/investment led consumption. Stimulus is actually like withdrawing money from the wealth producing side of the economy (Private sector through tax) washing it up (via whatever stimulus plan with whatever expensive name like QE) and then returning it to the wealth producing side of tthe economy. To me that sounds like a waste of time & prolonging a recession. The only way for growth to happen is if governments can be downscaled because as governments get bigger they start to hamper economic growth with their regulations. Austerity is a step in the right direction, It will hurt but the sonner the better! rather than a prolonged recession. As for BRICS, it would be retarded of them to follow such a flawed theory in their policy decissions. The developed world is proof that Keynesian theory is a failure.

Posted by kabza1 | Report as abusive

It’s interesting. The few who really did predict this crisis with great clarity well in advance (eg: Richard Duncan, Steve Keen, some others), understand the real nature of the problem: the bankruptcy of the dollar standard, private debt levels that ensue, and trade imbalances.

There is only one solution: the substitution of banks and global financial markets with global government and tight regulation. This would involve regulation of trade imbalances and write-down of private debt. This would entail a huge redistribution of accumulated wealth and the breakdown of prevailing global corporates and frameworks, but it would be for the better.

I agree with the above poster that Roubini is still with one foot in the status quo ante, and lacking some bravery with respect to imaginative alternatives.

Posted by FrankSz | Report as abusive

Virtual ‘money’ currency is universally issued as loaned principal at interest. No other source exists for interest servicing funds, but further borrowing of new principal at interest. This ‘perpetual money machine’ of co-generating currency-debt was likely contrived on the expectation that it could be controlled by dictating rates of interest (ergo, the ‘central bank’ notion), but that has proven a false delusion. The only way to smoothly transition out of the dilemma is to revert all banknote ‘money’ into a metallic form based on its residual purchase power as expressed prior to the inception of those banknotes. In the American case, given a 97% depreciation, the conversion would be to a 10 gram copper piece per banknote unit, leaving the free market bid-offer process to determine a ratio of coppers to silver and then to gold onward. This conversion leaves all nominal wage, price and account superstructure intact while eliminating the disasterous complex compounding of interest on the float and new issuence of currency worldwide.

Posted by PatFields | Report as abusive

Much of this is nothing more than what I call a Ruud Gullit dissertation – going back to when the Dutch footballer was manager of Fulham.

At a press conference he was receiving an endless list of all the possible future variants on life that might affect the club – expected to answer each with a crystal ball. Till he lost his temper and shut down the interview with…

“What if, what if, what if? If my auntie had balls she’d be my uncle!”

You can figure out the analogy on your own. If you’ve made it this far through the comments – and the article – you have too much time on your hands, anyway.

Posted by Eideard | Report as abusive

I have a lot of respect for Mr Roubini, but I am not sure I agree with everything in this article. I do agree that Greece should leave the Eurozone and I wrote to that effect some time ago. In fact, I feel that the Eurozone is doomed and the sooner it is disbanded the better. I don’t think a reduced, northern rump will work, as some commentators have suggested.

There is a lot of concern about Spain, but I think if it stops using the euro it is more likely to overcome its problems sooner than many of its neighbours. At 60% of GDP its national debt is lower than most of its Eurozone partners and I expect that a depreciation of its currency will allow it to recover sooner than, say, Italy. It has a large under utilised, trained work force. But everything depends on how things are done.

It concerns me that most commentators, regulatory authorities and other government bodies are preoccupied with the banking system and are concentrating on financial engineering. They are ignoring the real problem: the destruction of capital/wealth. The function of banks is to be a conduit for the investment of capital, so they are of secondary importance. Of course the banking system has failed miserably in recent years as it became a destroyer of capital. The worst example being in the US where the banks demolished 10,000′s of houses that they repossessed: a destruction of physical as well as financial capital. (And the government reimbursed them!)

For that reason I feel that “rescuing” Greece, etc will be counter productive. It will simply destroy more capital. Moreover, unless there are prolonged, significant GDP growths in the other European countries, most will not be able to repay their huge debts.

I fear that the developed world will suffer a very long recession/depression. It will be difficult for it to come out of it because it no longer produces much real wealth/capital. It exported production to developing countries. In addition, it will be hard for governments to wean their citizens off a life they can’t afford.

Roubini’s suggestion of improved education is not a quick fix solution as it would take too long to take effect. I doubt that there is a quick fix solution.

Posted by GivaFromOz | Report as abusive

Ninth: Break up monopolistic industries and oligopolies.

Posted by hootsie | Report as abusive

Our crisis is based, in part or in whole, on the fact that electoral constituencies do not understand the forces at work well enough to allow officials to take appropriate actions, while elected officials do not understand the forces at work well enough to teach their constituencies.

Posted by Bob9999 | Report as abusive

Is the coming HD (Horrible Depression) simply a consequence of capitalism? Greed is human nature, but Capitalism is a choice of sorts. Anyone see an alternative or do we just ride this tiger until it eats us?

Posted by Train_Ryder | Report as abusive

I disagree. And I have some credetials.

-I proposed a solution to the sovereign debt crisis in March 2009 when it was staring us in the face but it was a year before the sovereign debt crisis gained any media coverage.

-I coined the term Leman 2 some two years ago and the term GD2 (Great Depresion 2) more recently.

-I was requesting that any future bailouts to Greece, Ireland and Portugal be collateralised months ago because otherwise it is money down the drain that could be better spent limiting contagion. Greece, Ireland and Portugal will default as their debts are growing faster than their ability to service them.

-I rejected the concept of “the Arab Spring” because “Its the economy stupid”. 60% food price inflation when you are already on the breadline. Mubarac had been there for 30 years and Gadaffi for 40. the trigger was the economy.

To solve a problem you must fisrt understand the problem. I have set out my characterisation of the problem on the site http://www.forensicstatistician.com, the Guest Post. It is a bit UK oriented but our problems are fairly universal in the western world.

Please jump on me from a great height by commenting on the site. I bend to reason.

I wish to get on to the solution to “Avoiding a Leman 2 and a second Great Depression” which does not involve government spending, Highway 66 and Keynsian multipliers.

The key to the solution is to recognise that employers “employ”. That is what it says on the can.

Posted by objectiveknow | Report as abusive

“To raise the standard of living in one country, another must be lowered”.

A basic fundamental in an international free market.

The problem is, the countries that could be squeezed, have been squeezed. Now we are the ones being squeezed out of our own greed and illusion of being impregnable.

The great folly here is a snow ball effect. China is only a small fraction done evolving. However, they have played the game immaculately. Patience, technology acquisitions, and military build-up.
They represent 1/4 of the world’s population – the imbalance will be drawn from the fact that previously we have relied on being in the “top 10%” of the earth that lives like royalty while the rest were impoverished.
Now a single country alone will times this by 2.5 all by themselves.
All at a time when resource consumption is hitting new records.

Regrettably, either we get used to a downward spiral or there will be conflicts.
North America and Europe are now the ones being squeezed.
China will expand, South America will expand, Russia is expanding, and India is expanding.

Russia, China and India alone account for over half the population of the earth.

The old view of 10% above the 90% populace is going to make for very worrying times when the balance is finished shifting to 50-50.

These new emerging countries will have no qualm in staking resource claims viewed to be in their backyards when the time is right.

Unless everyone else lets us “rewrite” the books.
Or we stop suppressing evolutionist technologies to separate these states.

Posted by avgprsn | Report as abusive

Legalize drugs and tax them. Put a sales tax on gasoline instead of an excise tax. Limit personal and corporate deductions to a percentage of income. Lean on banks to reward homeowners who aren’t behind in their payments with a 1-month mortgage deferment or holiday. Restructure student loans. End wars.

Posted by sk8sonh2o | Report as abusive

Recession, Double Dip Recession and Great Depression? Are these our only choices? What about Slightly Bad Depression or Triple Dip Recession?

Posted by Slammy | Report as abusive

The only reason Greece hasn’t defaulted yet is that the holders of all that sovereign debt are refusing to take a haircut until the various people at the top swear they will make good their losses..

So, Greece is being forced into austerity measures that will actually force it into bankruptcy anyway, the various EU governments will cover the banks losses with taxpayer dollars and everybody lives happily ever after. Long live the Republic!

Posted by stanrich | Report as abusive

A 2nd Great Depression is inevitable. However most of the developed world has not acknowledged this yet. The OECD countries are still in denial, pretending that the world has not changed and that we can return to our glory days. More stimulus will not solved anything and only make the problem worst. However politicians and economists must pretend that they can solved the problem, otherwise how could they justify their salaries.
Batten down the hatches and hope you can find a seat in a lifeboat.

Posted by NRGoracle | Report as abusive

@stanrich – Greece is being forced into austerity to protect German and French banks. Speculators need reassurances, and a Greek default would mean significant fall-out in Germany and France, as well as the UK and elsewhere.

The irony is that it was the dumping of German surpluses into Southern Europe that contributed to an unsustainable debt-GDP ratio in the first place.

What needs to happen is that the major banks be permitted to fail, nationalised, broken up, and private debt written off.

Unfortunately today libertarianism and free market fundamentalism is an alias for bank-centrism. Anything that threatens private credit creation as the prime source of societal investment and direction is treated with hysteria as a return to Muscovite totalitarianism. Plainly, a return to statism is the only way forward.

Posted by FrankSz | Report as abusive

Why doesn’t this expert economist strike at the root? The issuance of money as debt is a false theory that distorts the free market and has a limited reign (in our case about 100 years, since the 1913 creation of the American central bank).

“Experts” can rearrange debt chairs on the Titanic all they want, but the system is freezing up because individuals and enterprises have maxed out on debt, and the forced creation of more paper money by finding more debt somewhere, somehow to potentiate its creation, is the exact WRONG solution. The dollar will be the last paper currency to tank, but tank it will under this system of “expert” money creation legerdemain.

We need a stand-alone money not dependent on politicians or bankers for its legal tender status, and certainly not dependent for its existence on the population’s going deeper into debt to a financial elite who offer a pittance in consideration when they create it!

You are operating on the wrong theory, Mr. Roubini. Your credentials mean nothing to me, other than their use in validating the present system and assuring you of an income by propping it up.

Posted by acudoc | Report as abusive

@ PatFields—Your comment deserves attention. Money as debt has not worked. We must wrest control of the money issuance power from politicians and bankers, or we all will be digging roots in a post division-of-labor world.

Posted by acudoc | Report as abusive

Agree with much of Mr. Roubini proposal. However the economic and financial situations of USA and EU are different, but both are trapped in lack of political speed to take actions. In the EU the actual financial volatility and panic affects the expectations for demand in the real economy and weekens the financial institutions. At the bottom of Europe we have low productivity, very dissimilar degrees of competitiveness, lack of monetary mechanisms to address monetary policy ad hoc to each country situation and lack of political consensus as to how to share the cost of the adjustment between countries and between social institutions (banks, corporations, workers).
What is needed in the EU is to draft a strategy in terms of timing, policy instruments, communication and coordinated actions. The first task is for the ECB and euro Governments to end the financial panic, that arises out of countries without much significant debt impact for the EZ economies and their banks. It is wrong to think that because Greece or Portugal leave the EZ we are destroying the euro. On the contrary, the euro works for countries with similar macroeconomic balances, not for every one just because it is in Western Europe!!. The IMF knows quite well how to handle that type of economic problem minimizing the social costs, as the examples of Asia, Argentina, Brazil and México attests in the last 15 years: Devaluate, debt restructure, privatize, deliver an income package for the poor and in some cases take over the week financial institutions by the Government until the financial sector becomes solvent (Mexico, Island). It has been done over and over in the past, and works. The cases of Spain and Italy are different. The adjustment in Spain is the high level of unemployment, and fiscal restrain. The same must be applied to Italy. In both cases a financial restructuring without hair cut must be in place. On the back of this financial adjustment, the ECB must be ready to support some financial institutions that can go bankrupt. Do not forget that in the US, hundreds of financial institutions have been closed. With the above actions one dispels the financial panic in the EZ within the next months. So it must be announced to the market in a coordinated fashion to give predictability to this strategy. What the Brics can do is first apply countercyclical policies and second, announce its willingness to aid the macrofinancial restructuring in the EZ, but with the assurance that the EU together with the IMF will deliver accordingly. The likely outcome will be to have a stabilized Europe, probably with low growth prospects in the medium term, until structural reforms work their way out into productivity. This takes time, but at least everybody will know that there is no free lunch and fiscal discipline becomes the trade mark of any elected Government.
The US has more ammunitions than the EU, to rescue its economy, but lacks political consensus probably until after the elections of 2012. If Democrats take control of the Executive and Senate then consistent policies can be applied. Tax reform, fiscal austerity, efficient government spending in infrastructure under a PPA program and incentives to job creation as applied in the case of the car sector must work. USA banks are loaded with cash but no demand insight. If Republicans take control, then the US will very likely slip into recession again the first two years until Congressional elections reverts this trend. It will be 4 years without grow and probably hurt very much the Republican Party.

Posted by EZC | Report as abusive

Today all the leaders, all the experts resemble people who are standing and making decisions in a vacuum, as the carpet, the whole foundation they based their calculations on has been pulled from underneath them.
All our present economical, political and social models are based on a free, expansive system, where self benefit, increasing profit and unstoppable growth was a possibility.
What we do not seem to understand or accept today is that the rules of the game have changed.
Humanity, through multiple well known factors as population growth, large scale migration, industry, corporations becoming multi national, technological advances, etc has evolved into this global, interconnected system, which puts different conditions around us, conditions which are almost completely opposite to the ones before.
There is no room for further expansion, sharp competition, exploitation of others or the environment in a network where we are all chained to each other on multiple level, and depend on each other for basic necessities.
Simple, or even complex economical, or financial, even political methods, solutions are incapable of solving our crisis unless first of all we understand the system we exist in with all its conditions.
As human beings are the most adaptive creatures, as soon as we understand the foundations we will be able to come up with solutions easily.
But first we need to study the system around us, and ourselves, and our role in the system. The new keywords we have to work with our mutuality, responsibility and cooperation.

Posted by ZGHerm | Report as abusive

Professor Roubini proposes restoring competitiveness through pumping liquidity into Western economies, which, besides general bank and sovereign treasury bailout, should include “massive new investments in high-quality education, job training and human-capital improvements, infrastructure, and alternative/renewable energy”. In one recent interview, Professor Roubini said that Karl Marx was right that the capitalist economy had an uncontrollable potential of self-destruction. Karl Marx’s name is usually connected to failed socialist experiments of controllable economies and ineffective government investments. However, modern Western economists still don’t understand the main Marx’s thesis about manufacturing forces as a basis of any economy. It’s naive to think that Marxist China will sustain conditions for service and innovation growth in “advanced” economies. It’s manufacturing that creates demand in services, spurs technical innovation and demand in engineers. Without restoring manufacturing, any “investments” in education and infrastructure would just produce new bureaucrats and Ponzi-scheme “innovations”.

Posted by PavelLevin | Report as abusive

This is laughable. The US can AFFORD short-term economic stimulus? Is he serious or is he going to provide a second article in which he says, just kidding, here’s my real argument?

The stimulus IS the problem. We’re facing the hangover of years and years of monitary and fiscal stimulus and now the solution is more?!

Where do these people learn economics? Kindergarden? Fairy tales? I bet Roubini will say that Santa Claus needs to drop “stimulus” on the world to boost the economy.

If a government provides “stimulus,” it must first TAKE those rescources from the private economy. Even if you make the argument that the government would make better use of such funds (laughable), this would have so be great in order to pay for the cost of collecting such funds in the first place, let alone doling them out.

If this process worked, the Soviets would have won the cold war.

Just another Keynesian clueless hack who has no-idea whats going on.

We need monitary and fiscal re-hab. Sure it will hurt for a couple years, but after we’ll have REAL growth.

If we take this idiotic advice, sure we’ll be chugging along for a couple years, but then we face a world wide currency collapse.

Yeesh, how people buy this crap… I have no idea.

Posted by aboyo | Report as abusive

In my opinion, we are ALREADY IN a DEPRESSION!!!

Posted by csmarker | Report as abusive

I’m yet to hear a convincing argument about why Protectionism isn’t good for a fully developed currency appreciated country like the US. Just about every single “new business” / tech startup seeks employees from a low currency geography.

If a private enterprise wanted to create a super high speed rail system powered by non-oil based fuel, even if that technology doesn’t exist elsewhere in the world, there is a strong likelihood that this enterprise will outsource a good portion of the labor to a different country — because a Hedge Fund manager sitting in NY who might have funded this company will force the CEO for profitability. Please Explain.

Posted by Penman | Report as abusive

@Penman – there are a number of reasons why protectionism would not be a good idea at the moment for the USA, but ultimately global mutual protectionism is the correct way forward – but this is basically what mechanisms like the bancor or SDR-based global trade currency really advocate: prevention of imbalances through centrally administered “protectionism” fairly administered to all.

For why a nationalist rush to protectionism would be a disaster right now, for the USA, you simply have to look first at what the USA actually produces: almost nothing. The USA has been de-industrialising for decades and in order to “protect” itself, it would have to begin actually making things again. This would take time, and primarily: debt.

The private sector in the USA is broke. The only way out for the private sector is to hope for increased state funding (the anarchist extremists in the USA will prevent this), or for those very anarchist extremists to focus their attention on the banks – have them nationalised/bankrupted and private debt written off.

Other reasons include the ensuing trade war. If the USA, through protectionist measures, was to invoke mass unemployment in the x-billion population of China-ASEAN, you could happily expect World War 3 and nothing short of it.

Posted by FrankSz | Report as abusive

$645 TRILLION of deregulated derivatives traded between 2000 – June 2008. $645 TRILLION!!!! This is the BLACK hole the world economy is trying to climb out of. The workers and ordinary people around the world are being punished for this elaborate PONZI scheme. Lehman was just the fall guy. The repeal of the Glass Steagall act in 1999 allowed investment bankers to become depository bankers/ mortgage lenders. Then deregulation of derivatives in 2000, mastermined by Phil Gramm (R) TX with the GLB act and CFM act resulted in no SEC oversight and 40 – 1 odds. Investment bankers are risk takers by the nature of their business. Derivative money was laundered into mortgages with high risk subprime loans. Since they were selling off MBS’s to Fannie, Freddie, it didn’t matter what the risks’ were. Besides AIG guaranteed repayment of the money with credit default swaps. Big banks around the world traded derivatives using government treasuries i.e. tax payers money.(normally, only governments have access to this amount of capital). When AIG defaulted on $14 Billion credit default swaps in 2008, the PONZI scheme started to unravel. One comment mentioned we have known for last 10-15 years baby boomers around the world are going to start retirng. So maybe this is the political solution to the baby boomers. (Who drove the economies for most of the last 40 years.) Remember, 90 Senators voted to repeal the Glass Steagall act. Only 8 Senators voted NO and 2 abstained. One of those 8 should be President!!!!!

Posted by vietnam2 | Report as abusive

What the United States and the Euro-Zone countries need to do is a simple marketing campaign as follows:

“If your happy and you know it spend your cash. If your happy and you know it spend your cash. If your happy and you know it and you really wanna show it. If your happy and your know it spend your cash.”

Simple solution to a complex problem. People need to start spending again.

Posted by tehnitis55 | Report as abusive

We all have to pitch in to help America. I am in the automotive industry in the mid-west. From 2007 till now I’ve seen so many dealerships close to never re-open. 30 percent of dealerships in america have closed. I decided to do something about it. I launched a Website called Fixedopjobs.com in January 2011 and have posted over 300 jobs for free for Automotive dealers. We all have to do our part to put America back together. We can’t sit back and do nothing or HOPE that CHANGE will happen on its own. We can’t blame Obama, Congress, or the jerks who fire people for no reason everyday. One-by-one, we all have to make it happen. Period.

Posted by Fixedopjobs.com | Report as abusive

The principle of “Fractional Reserve Banking” and the perverse amount of infleunce that commercial banks have been allowed to exert in all our lives has been our undoing. There are voices of sanity beginning to be heard, e.g. the Positive Money initiative in the UK. Check out http://www.positivemoney.org.uk Let’s hope it is not too late and our world leaders actual start to demonstrate some real leadership.

Posted by CornwallLad | Report as abusive

The 20th century & early 21st showed us that ANY & EVERY system can fail- communism, capitalism, dictatorship, democracy – you name it; and that’s because Mankind has failed these systems and not the other way around. These all-out efforts in the Eurozone and those in the US have been last-ditch ones to perpetuate unsustainable lifestyles. 20th century business ethics depend upon the unspoken rule -one that has only tacit acceptance, but people in general are not willing to openly admit-and that is: for someone to win somewhere somebody has to lose elsewhere, and badly. Mankind has to grow, to evolve, to learn to do business in which there are no losers. For too long we have been thinking within our boundaries, problems “outside” our borders are NEVER “our”problems. THIS is the problem THE crisis which should teach us to think globally, and realize that if there are starving people elsewhere, then it is OUR problem, because one day these problems will be on our doorstep

Posted by drphaniraj | Report as abusive